 # Collateralized commodity futures question

A manager establishes a collateralized commodity futures position with a contract value of \$20 million. He purchases 60-day Treasury bills with a bank discount yield of 8.867% to collateralize the futures position. After 60 days, the loss on the futures position is \$100,000. The holding period return on the collateralized futures position is closest to: A) -0.5000% B) 0.9978% C) 1.000% D) 1.2254%

C

HPY = 300k

actually i get .98999% wtf this is tricky. B or C.

What do you use to come up with C?

D

C is final answer. 200/20mil - 1

I get C as well

convert the BDY to HPY .08867 x 60/360

pepp…i don’t follow something… if u convert that BDY to HPY…don’t u then multiply it times the \$20mm… to get a +\$295,566 subtract out the 100k loss… so 195,566/\$20mm =0.9778% which is b

nopes, I convert BDY to HPY i get .01477, now (1-.01477) is the price at which you bought per \$ of treasury. so your HPY = .01477 / (1-.01477)

You are right with C, I was just trying to figure out how you had come to the answer. I just didn’t use the BDY formula correctly the first time. Makes a small difference, but also made me pick the wrong answer.

You pay 19704434, at the end of the 60 day, you receive 20mil - 100k. So the return is (20mil - 100k) / 19704434 = .9925% I got 19704434 by doing 20mil*(1- 8.867%/2/3) Where am I going wrong?

tsetse I think you are right. TBill: (1-.08867 * 60/360) * 20M = 1970443 Futures Position: 20000000-100000=1990000 HPY = (1990000 - 1970443) / 1970443 = .9925 CP

I think you should do it like this…your starting investment is value of T-Bills + futures Starting = \$19,704,433 + \$20,000,000 Ending = \$39,900,000 Ending/Starting -1 = 1.00%

thats true!! calculate it like a covered call or protective put. Thanks!!

nirjraina Wrote: ------------------------------------------------------- > I think you should do it like this…your starting > investment is value of T-Bills + futures > > Starting = \$19,704,433 + \$20,000,000 > > Ending = \$39,900,000 > > Ending/Starting -1 = 1.00% Yikes. That’s just not how it works. The value of a futures contract when you buy it is 0. tsetse and cpk above have the right answer for sure and for certain.

That makes sense - At the start - when you initially open your collateralized futures position the only value you have is the value of your t-bill - 19,704,433. Then, after 60 days your t-bill matures and you have 20,000,000 but you must subtract out the loss of 100,000 on your futures position so you have 19,900,000. HPR = (19,900,000 - 19,704,433)/19,704,433 = .9925. So, in this case, which answer would you choose B or C?

I would say the answers are messed and go on. If you understand above (the part after your “that makes sense”) then you are good to go.